Employment Allowance 2025/26: The Definitive Guide

April 6, 2025 • 11 min read

The Employment Allowance (EA) is one of the most generous tax reliefs available to small businesses. For 2025/26, the potential saving has doubled.

Old Allowance: £5,000.
New Allowance: £10,500.

However, for Limited Company Directors, accessing this pot of gold is not straightforward. Stringent anti-avoidance rules block "Sole Director" companies from claiming.

This guide explains the rules, the 2025/26 thresholds, and the legitimate strategies (like hiring a spouse) that can unlock the allowance.

What is the Employment Allowance?

The EA allows eligible employers to reduce their annual Class 1 Secondary National Insurance liability. It does NOT reduce Employee NICs (which come out of the staff's pay). It only reduces the Employer's cost.

Why is it critical in 2025/26?

Because the cost of employing people has skyrocketed.

Threshold Drop: Employer NICs now kick in at £5,000 (down from £9,100).
Rate Rise: The rate is now 15% (up from 13.8%).

The Impact on a £12,570 Salary:

Without EA: You pay £1,135 in Employer NICs.
With EA: You pay £0.

The "Sole Director" Restriction

Since 2016, HMRC has blocked companies where the only employee is a director from claiming the annual allowance.

Scenario A: You are the sole director and have no other staff.
- Result: ❌ NOT ELIGIBLE. You must pay full Employer NICs on salary above £5,000.
Scenario B: You are the sole director, but you employ a part-time assistant (who is earning above the secondary threshold).
- Result: ✅ ELIGIBLE.

The "Secondary Threshold" Test: To qualify as having an "additional employee", that employee typically needs to be paid above the Secondary Threshold (£5,000). If you pay them £100 a month, HMRC may argue you are still a single-person entity for EA purposes (though the exact legislation focuses on liable earnings).

Strategy: Hiring a Spouse or Partner

This is the most common and effective strategy for family-run businesses. If your spouse/partner does genuine work for the company (admin, bookkeeping, marketing), you can put them on the payroll.

The "Double Salary" Benefit

By hiring a spouse and paying them £12,570:

You unlock EA: Your company is no longer a "Sole Director" entity.
Director Salary £12,570: Employer NIC £1,135 -> Covered by EA (£0 cost).
Spouse Salary £12,570: Employer NIC £1,135 -> Covered by EA (£0 cost).
Corporation Tax Deduction: You deduct £25,140 from your profits as salary expenses.
- Saving: ~£4,776 in Corporation Tax.
Family Income: £25,140 tax-free extraction (assuming both have full Personal Allowance).

The "Commercial Justification" Warning

You cannot just add a spouse to the payroll to save tax. They must do the work.

Audit Risk: HMRC may ask for evidence of duties (timesheets, emails, work output).
Rate of Pay: The salary must be commercially reasonable. Paying £12,570 for 1 hour of filing a month is not commercially reasonable and could be disallowed as a deduction.

Connected Companies Rule

You cannot claim the full £10,500 allowance for multiple companies if they are "connected" (e.g., you own 100% of two different companies).

You act as a single unit.
You get one £10,500 allowance to share between them.

De Minimis State Aid?

Previously, EA counted towards "De Minimis State Aid" limits for some sectors. With the new expansion, check if your business sector (e.g. haulage, agriculture) has specific caps, but for most consulting LTDs, this is not an issue.

How to Claim

You claim via your payroll software (Basic PAYE Tools, Xero, QuickBooks).

Action: Tick the "Claim Employment Allowance" box in the Employer Settings.
Submission: This sends an EPS (Employer Payment Summary) to HMRC reducing your liability.
Timing: You can claim at any time in the tax year, and it backdates to April 6th.

Summary Checklist

Sole Director? If yes, you pay full Employer NICs. Consider the £5,000 or £6,396 salary levels.
Have Staff? Ensure you have ticked the box to claim the £10,500 EA.
Hiring Spouse? Ensure work is genuine and contracts are in place.

Disclaimer: Anti-avoidance rules are strict. Consult an accountant before adding family members to payroll.